U.S. Tobacco Profits Soar Despite Drop In Number Of Smokers

The number of Americans smoking cigarettes has fallen sharply over the past two decades, yet U.S. cigarette companies are doing just fine. In fact, better than fine - reporter Jennifer Maloney of The Wall Street Journal found revenue is soaring. Her piece in today's Journal details how this industry, in dire trouble not that long ago, staged a massive turnaround. Jennifer, welcome to the program.

JENNIFER MALONEY: Thanks for having me.

CORNISH: So there are a couple of factors at play, but the most interesting is cost because cigarettes are the most expensive they've ever been. And a lot of people assume that this is because of taxes - right? - state and local taxes. What's going on?

MALONEY: Well, it's true. Taxes are going up. But each time a tax increase gets passed the tobacco industry tacks on a little bit extra. So in fact, their profit margins go up each time, too.

CORNISH: How much are we talking?

MALONEY: Well, the profit margins are growing every single year. They've gone up 77 percent since 2007.

CORNISH: So is there, like, a typical or average price of a pack of cigarettes? And how much more of that is just plain profit?

MALONEY: Yeah, so the average pack in the U.S. last year was around $6.42, and 42 percent of that went to taxes. About 20 went to operating profit for the manufacturers.

CORNISH: So that's still a big chunk that's going to taxes, right?

MALONEY: It is. But it's actually not as big a chunk as you might find elsewhere in the developed world. For example, in the U.K., 82 percent of the average pack goes to taxes.

CORNISH: So you also write another issue is just consolidation in the industry. So apparently in the mid-'90s, the tobacco market had seven major players. What's it down to now?

MALONEY: Today there are just two. There's Altria, which makes Marlboro cigarettes, and there's Reynolds American, which makes Newports and Camels. There are, however, global tobacco players that after having pulled out in the early 2000s are now trying to get back into the U.S. So the U.S., which once was considered kind of a toxic market, is now one of the most appealing markets in the world.

CORNISH: You said toxic. Is that because of the stigma around in this country as people were trying to, I guess, increase smoking cessation programs?

MALONEY: In the mid-'90s, there was a major crisis for the tobacco industry in the U.S. And it was a combination of a public relations nightmare coupled with massive lawsuits that came in an avalanche. And for the first time in the mid-'90s they were also facing the prospect of federal regulation. And all of that combined to make folks in the industry fear for the future of the industry. However, it didn't turn out to be that bad. They settled most of those major lawsuits, and the legislation that was passed in 2009 giving the FDA regulatory control over tobacco actually created a high barrier for entry to new players to the market. So that meant that the existing players in the U.S. tobacco industry were sort of reinforced, and it was really difficult to enter the market as a new player.

CORNISH: You write in your story that Americans are spending more on tobacco than even beer and soda. I mean, were you surprised at this? You've been on this beat for a while.

MALONEY: That was a statistic that really blew me away. And it speaks to the prices. Prices just keep ticking up.

CORNISH: At the same time, if you have fewer American smokers - right? - do you have a sense that this is, like, a fleeting moment?

MALONEY: So the industry believes that for the foreseeable future they'll be able to generate a good amount of revenue from cigarettes. But they know that this won't last forever, so they are using this money to develop new alternative products such as e-cigarettes in the hopes that one day, as Americans shift from smoking cigarettes to other products, they'll be ready to deliver those products.

CORNISH: That's Jennifer Maloney. She's a reporter from The Wall Street Journal. Thank you so much for sharing your reporting with us.